Ending a Partnership
4th September, 2019
Partnerships, which are distinct from Limited Liability Partnerships, Limited Partnerships and Limited Companies, have gone out of fashion in some sectors and are no longer the popular form of business structure they once were. In other sectors however, they are very much still the norm.
Partnerships have been around for centuries and the law which governs them has developed over that period. This article is a rough guide to the process of working out who is owed what from a partnership at its end. The caveat is that the process is complicated so advice in relation to your specific situation should always be sought.
The Partnership Act provides a lot of rules for the legal consequences of partnership including what happens when a partnership comes to an end. However, some of those rules can be displaced by specific agreements between the partners and that it will often be the case that partners enter a bespoke partnership agreement to govern their affairs. The most common question at the end of the partnership is “how much am I entitled to?”
Because partnerships governed by a bespoke partnership agreement can make specific provisions for who is entitled to what, the rest of the article looks at the default position under the partnership act if there is no specific agreement between the partners.
It assumes that a partnership exists, that the assets and liabilities of the partnership are agreed (which anyone who has experience of these matters will tell you is not a common situation!). It is also assumes that the assets of the partnership are greater than the liabilities, where this is not the case things become more complicated
Partners in a partnership do not have any entitlement to any specific partnership asset or the equity in it. All that any partner is entitled to is their share in the residue of a partnership asset once its liabilities have been paid.
It is a reasonably complex process to work out what the net assets of a partnership are. Vital to this process is having an up to date set of partnership accounts.
These accounts will contain a statement stating what each partner has invested (known as their capital account) and what their share of profits in the current period is (known as the current account). The current account is share of profit (in whatever proportions have been agreed or in default agreement equal shares) less what has been drawn during the period of the accounts by each partner.
From there it is a case of working through the steps in s.44 (b) which are as follows:
- First, establish the pot of assets and pay from it any debts of the firm to people who are not partners.
For example, if the partnership owes money to suppliers or a bank.
- Secondly, any partner that has loaned money to the partnership is then to be repaid that loan or ‘advance
Advances or loans are different from the capital and are repaid first.
- Thirdly, from the remaining pot any amount standing to the credit of each partners capital balance should be repaid.
- Finally, if any residue is left over, it is to be divided up between the partners in the proportion in which profits are shared.
For example, if after steps one, two and three above, there is £90,000 remaining in the asset pot, and there are three partners who share profits equally, each partner will receive £30,000.
Unfortunately, when partnerships end the process of winding up its affairs are rarely straightforward.
Many issues may arise to be disputed such as; what are the assets? For instance disagreements often arise in regards to whether the land is owned by a partnership or one of the partners individually.
The best way to avoid such disputes is to keep accurate records of what is agreed between partners and to make sure the partnership accounts accurately reflect such agreements.
If you find yourself needing advice on ending a partnership, contact David Mann, Dispute Resolution Partner.
You might also be interested in...
9th May, 2022
Chester-based law firm Aaron & Partners will host delegates from all over the world in its home city... Read More »